8 ms·

Adam Smith Hates Bitcoin

29 points by atestu 14y ago

guylhem 14y ago
Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading title suggest, but Krugman. The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement. Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the alternative uses which where then prevented. There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock". In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing! How could Adam Smith may have hated something that did not exist back then, and that many economists had previously advocated for - a single worldwide fiat currency. The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money. Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends. Also, it's quite fun that a system based on trust, of the people, by the people, is not trusting the government. It's something the founding fathers would certainly be quite proud of :-) EDIT: And to those who argue the amount of computing power and electricity to run the bitcoin network is insane, just think for a second about Moore law, or how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is a whole lot of money for the simple job of allocating resources (currency, saving, investment, transaction, etc). It seems ripe for disruption. A bitcoin economy will be able to do the same job for a fraction of these cost, thus allowing capital to be best spent on other uses (say actually advancing technology, or building real stuff) ie human capital and physical capital, which according to mainstream economic growth theory (from Solow to Romer) is essential for economic growth - real economic growth. If you have some data and some time to spend, draw a graph of the log of gdp per capital and the percentage of the gdp spend on the finance sector. You'll see a strange recent trend - less growth, and more gdp for the finance sector. I'm not arguing a causation, but that's some food for throughts. Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow. It's a blessing to anyone who can provide value.
- andyakb 14y ago
  You dont refute his point at all. There is something inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock;" the fact that you need to take an insane amount of computing power and electricity to "create" new bitcoin. He could hate something that did not exist in his lifetime because he hated the principles that are fundamental to the process.
  - bbbhn 14y ago
    You don't need an insane amount of computing power to create new bitcoins. The amount of bitcoins generated every ten minutes is essentially set in stone. What drives people to dedicate more and more computing power to the mining process is market incentives: as you put more computing power into securing bitcoin, more of the generated bitcoins end up in your wallet.
- pavanky 14y ago
  The only way bitcoins are being generated is by wasting computer cycles solving problems that are of no use to anyone. Krugman's problem is not with the concept of bitcoin, but the process of mining. I may not be an economist, but the method used for mining seemed.. illogical to me as well. If a bitcoin was released into the wild based on running real world problems like folding@home or something else it would have much more sense to me.
  - NewAccnt 14y ago
    But you're both completely missing the point that mining for coins will become exponentially more efficient over time, with new mining techniques and hardware.
    - wmf 14y ago
      When more energy-efficient mining equipment is created, people buy enough of the equipment to use the same amount of power that they used to have. For example, one might replace a 300 W GPU with a 300 W ASIC miner. The total amount of mining is determined by the exchange rate; since the exchange rate is expected to increase due to deflation, the amount of power spent on mining is also expected to increase dramatically.
jshen 14y ago
I think his previous statements are also significant. "[bitcoin] has fluctuated sharply, but overall it has soared. So buying into [bitcoin] has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in [bitcoin]."
- deleted 14y ago
  [deleted]
- lucasrp 14y ago
  This is not what is happening right now. Fact. BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available. Isnt that a system that "facilitate transactions and make the economy as a whole rich"?? Consider this initial profit just by hoarding Bitcoin as a reward to put your own assets at risk in this uncertain beginning. Bitcoins can't exist (or anything else, matter of fact), if the people who supports it arent driven by selfish motivation. I think it's fair that the people who risk themselves in the beginning are awarded, if Bitcoin succeeds.
  - dragonwriter 14y ago
    > BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available. First: inflation isn't equivalent to taxation (it transfers wealth from net creditors to net debtors, not from everyone else to the government.) [It also, at moderate levels, promotes investment and, thereby, economic growth.] Second: as consensus among those who control a sufficient portion of the network can evolve the bitcoin protocol, its not actually immune to having a privileged class impose monetary policy. Third: Except by replacing some functions of "bankers" with those of "miners", I'm not sure how Bitcoin gets away from any "banking monopolies" that actually exist. > Isnt that a system that "facilitate transactions and make the economy as a whole rich"?? No, it would (assuming that the features which make inflation impossible were maintained) be a system which undermines the features that were introduced to encourage productive development (and, therefore, "make the economy as a whole rich") with deflationary features which have the opposite effect.
lucasrp 14y ago
Krugman obviously don't know what he is talking about. The resources he is talking about are used to process the transactions between bitcoin owners. The mining is just a side effect. How did a nobel prize winner made a so basic mistake on a topic that has been covered before by him so many times? Bet one Btc that he did that on purpose.
- bbbhn 14y ago
  Krugman is an arrogant ass. He makes sweeping generalizations about topics he knows little to nothing about all the time.
- slg 14y ago
  In theory, yes you are correct. But you can't tell me all the computer resources that are spent on mining are required to process transactions. There are a whole lot of wasted cycles, electricity, and other resources.
  - teraflop 14y ago
    The resources are required to process transactions securely in a distributed network. You could do the same thing much more efficiently by putting all your trust in a central authority; it's called a bank. But that's not solving the same problem.
    - slg 14y ago
      Ok, let me rephrase my prior point. If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? If there is no noticeable benefit from my single PC then the resources being used by that PC aren't contributing to anything of value. Yes, resources are required, but the amount of resources used far and away exceeds the amount of resources required.
      - bcoates 14y ago
        > If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? Yes, there's a computational power threshold to perform certain attacks against the network, and removing your node marginally decreases that threshold. Is it necessary? That depends on your priorities and your threat model.
bbbhn 14y ago
Krugman doesn't understand Bitcoin. The computing power expended on mining is used to secure the Bitcoin network. There are many, many costs associated with securing the integrity of established financial networks too.
- penny500 14y ago
  Once you secure the system however, the costs of increasing currency into that system is trivial.
- jedberg 14y ago
  > The computing power expended on mining is used to secure the Bitcoin network. Could you expand on this? I'm not sure I understand it. Thanks.
  - maaku 14y ago
    Miners choose transactions which obey the network rules. They then "vote" on which transactions to commit by exerting computational power. To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure.
    - dragonwriter 14y ago
      > To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure. There are plenty of organizations that, if they wished to mess with bitcoin, could easily afford more computing power than the bitcoin network (yes, even though that is "bigger than any supercomputer".) Included in these organizations are ones (such as the US government) that have been accused by some of bitcoins proponents of being actively attacking bitcoin. So why should we consider confirmed transactions to be secure?
Glyptodon 14y ago
I suppose he actually compared the costs of mining with the costs of minting paper money? Because that sure seems to missing...
- penny500 14y ago
  How much does it cost to change bits of data on a computer? That's what happens with quantitative easing. Bernanke isn't calling up the printing presses to print $2 trillion in paper currency.
  - kirian 14y ago
    Central banks and central bankers don't work for free. How much is spent on normal banking infrastructure, cash security vans, fraud protection etc.
    - penny500 14y ago
      That's not how quantitative easing works. Quantitative easing doesn't fire up the printing presses. Bernanke can add $2 trillion into the system within 15 minutes, and no paper money is printed or manpower expensed aside from a few clicks on a computer mouse. Once you secure your financial system network, adding currency adds virtually no costs relative to the amount of currency you put into that system. You've already secured the network. It's akin to Facebook's security system. It works the same regardless if it's 100 million users or 1 billion users.
      - kirian 14y ago
        My point is that fiat money systems have costs associated with them. I'm not arguing that the costs change if there is Quantitative easing or not.
      - parasubvert 14y ago
        $2 trillion in 15 minutes might be a wee bit of an exaggeration... considering the monetary base needs to, um, actually buy something, usually Treasury Bills. Which are managed by whole swath of administrators in the Dept of the Treasury (and could lead to printing presses -- for the T-Bills, anyway), as they're usually issued in bond series, etc.
tatsuke95 14y ago
>Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack. Funny thing,I called MG Seigler a hack, and was attacked. Even PG came out of the word works to say he was "embarrassed" by the comment. Now we are calling Nobel prize winning economists hacks and asses? The economic illiteracy of this place is what is embarrassing.
- aristidb 14y ago
  This should have been a reply. Attacking somebody else's comment by citing him in a new top-level comment is bad form.
- bcoates 14y ago
  I'd feel bad about it if the "Nobel Prize in Economics" wasn't a fraud.
parasubvert 14y ago
I think Bitcoin is useful as an experiment in economics and monetary systems. But the thinking is far from baked and opportunists are jumping on this so quickly that a lot of money is going to be lost, .com-style. Maybe not with Bitcoin, but perhaps with its successor. And a lot more money than the .com bust, because now we're not dealing with just "new economy" utopias, we're dealing with 100+ year ideological disagreements. Just looking at the comments here, most people seem to have received their economic eduction from political rants and newspaper editorial pages rather than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek, Schumpeter, or even Polanyi and Drucker). This is not to say the profession of economics is noble or even has any real use to the modern world currently, given its problems. But we do have an economic system, and some people do seem to have a better empirical understanding of it than others. And I'm not seeing a lot of empiricism here - lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's a good way to start something, but it's not a great way for it to finish the way you want. Ask the Marxists.
croddin 14y ago
What is the opportunity cost for bitcoin mining using different techniques? (ie the next most valuable thing that can be done with the hardware). I would guess it is a small fraction of the value of a bitcoin. I'm pretty sure it didn't cost bitcoin's market cap of ~1 billion in computing resources to mine all of bitcoins we have today. I wonder what it did cost?

29 points by atestu 14y ago

Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading title suggest, but Krugman. The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement. Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the alternative uses which where then prevented. There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock". In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing! How could Adam Smith may have hated something that did not exist back then, and that many economists had previously advocated for - a single worldwide fiat currency. The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money. Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends. Also, it's quite fun that a system based on trust, of the people, by the people, is not trusting the government. It's something the founding fathers would certainly be quite proud of :-) EDIT: And to those who argue the amount of computing power and electricity to run the bitcoin network is insane, just think for a second about Moore law, or how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is a whole lot of money for the simple job of allocating resources (currency, saving, investment, transaction, etc). It seems ripe for disruption. A bitcoin economy will be able to do the same job for a fraction of these cost, thus allowing capital to be best spent on other uses (say actually advancing technology, or building real stuff) ie human capital and physical capital, which according to mainstream economic growth theory (from Solow to Romer) is essential for economic growth - real economic growth. If you have some data and some time to spend, draw a graph of the log of gdp per capital and the percentage of the gdp spend on the finance sector. You'll see a strange recent trend - less growth, and more gdp for the finance sector. I'm not arguing a causation, but that's some food for throughts. Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow. It's a blessing to anyone who can provide value.

andyakb 14y ago
You dont refute his point at all. There is something inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock;" the fact that you need to take an insane amount of computing power and electricity to "create" new bitcoin. He could hate something that did not exist in his lifetime because he hated the principles that are fundamental to the process.
- bbbhn 14y ago
  You don't need an insane amount of computing power to create new bitcoins. The amount of bitcoins generated every ten minutes is essentially set in stone. What drives people to dedicate more and more computing power to the mining process is market incentives: as you put more computing power into securing bitcoin, more of the generated bitcoins end up in your wallet.
pavanky 14y ago
The only way bitcoins are being generated is by wasting computer cycles solving problems that are of no use to anyone. Krugman's problem is not with the concept of bitcoin, but the process of mining. I may not be an economist, but the method used for mining seemed.. illogical to me as well. If a bitcoin was released into the wild based on running real world problems like folding@home or something else it would have much more sense to me.
- NewAccnt 14y ago
  But you're both completely missing the point that mining for coins will become exponentially more efficient over time, with new mining techniques and hardware.
  - wmf 14y ago
    When more energy-efficient mining equipment is created, people buy enough of the equipment to use the same amount of power that they used to have. For example, one might replace a 300 W GPU with a 300 W ASIC miner. The total amount of mining is determined by the exchange rate; since the exchange rate is expected to increase due to deflation, the amount of power spent on mining is also expected to increase dramatically.

jshen 14y ago

I think his previous statements are also significant. "[bitcoin] has fluctuated sharply, but overall it has soared. So buying into [bitcoin] has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in [bitcoin]."

deleted 14y ago
[deleted]
lucasrp 14y ago
This is not what is happening right now. Fact. BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available. Isnt that a system that "facilitate transactions and make the economy as a whole rich"?? Consider this initial profit just by hoarding Bitcoin as a reward to put your own assets at risk in this uncertain beginning. Bitcoins can't exist (or anything else, matter of fact), if the people who supports it arent driven by selfish motivation. I think it's fair that the people who risk themselves in the beginning are awarded, if Bitcoin succeeds.
- dragonwriter 14y ago
  > BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available. First: inflation isn't equivalent to taxation (it transfers wealth from net creditors to net debtors, not from everyone else to the government.) [It also, at moderate levels, promotes investment and, thereby, economic growth.] Second: as consensus among those who control a sufficient portion of the network can evolve the bitcoin protocol, its not actually immune to having a privileged class impose monetary policy. Third: Except by replacing some functions of "bankers" with those of "miners", I'm not sure how Bitcoin gets away from any "banking monopolies" that actually exist. > Isnt that a system that "facilitate transactions and make the economy as a whole rich"?? No, it would (assuming that the features which make inflation impossible were maintained) be a system which undermines the features that were introduced to encourage productive development (and, therefore, "make the economy as a whole rich") with deflationary features which have the opposite effect.

lucasrp 14y ago

Krugman obviously don't know what he is talking about. The resources he is talking about are used to process the transactions between bitcoin owners. The mining is just a side effect. How did a nobel prize winner made a so basic mistake on a topic that has been covered before by him so many times? Bet one Btc that he did that on purpose.

bbbhn 14y ago
Krugman is an arrogant ass. He makes sweeping generalizations about topics he knows little to nothing about all the time.
slg 14y ago
In theory, yes you are correct. But you can't tell me all the computer resources that are spent on mining are required to process transactions. There are a whole lot of wasted cycles, electricity, and other resources.
- teraflop 14y ago
  The resources are required to process transactions securely in a distributed network. You could do the same thing much more efficiently by putting all your trust in a central authority; it's called a bank. But that's not solving the same problem.
  - slg 14y ago
    Ok, let me rephrase my prior point. If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? If there is no noticeable benefit from my single PC then the resources being used by that PC aren't contributing to anything of value. Yes, resources are required, but the amount of resources used far and away exceeds the amount of resources required.
    - bcoates 14y ago
      > If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? Yes, there's a computational power threshold to perform certain attacks against the network, and removing your node marginally decreases that threshold. Is it necessary? That depends on your priorities and your threat model.

bbbhn 14y ago

Krugman doesn't understand Bitcoin. The computing power expended on mining is used to secure the Bitcoin network. There are many, many costs associated with securing the integrity of established financial networks too.

penny500 14y ago
Once you secure the system however, the costs of increasing currency into that system is trivial.
jedberg 14y ago
> The computing power expended on mining is used to secure the Bitcoin network. Could you expand on this? I'm not sure I understand it. Thanks.
- maaku 14y ago
  Miners choose transactions which obey the network rules. They then "vote" on which transactions to commit by exerting computational power. To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure.
  - dragonwriter 14y ago
    > To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure. There are plenty of organizations that, if they wished to mess with bitcoin, could easily afford more computing power than the bitcoin network (yes, even though that is "bigger than any supercomputer".) Included in these organizations are ones (such as the US government) that have been accused by some of bitcoins proponents of being actively attacking bitcoin. So why should we consider confirmed transactions to be secure?

Glyptodon 14y ago

I suppose he actually compared the costs of mining with the costs of minting paper money? Because that sure seems to missing...

penny500 14y ago
How much does it cost to change bits of data on a computer? That's what happens with quantitative easing. Bernanke isn't calling up the printing presses to print $2 trillion in paper currency.
- kirian 14y ago
  Central banks and central bankers don't work for free. How much is spent on normal banking infrastructure, cash security vans, fraud protection etc.
  - penny500 14y ago
    That's not how quantitative easing works. Quantitative easing doesn't fire up the printing presses. Bernanke can add $2 trillion into the system within 15 minutes, and no paper money is printed or manpower expensed aside from a few clicks on a computer mouse. Once you secure your financial system network, adding currency adds virtually no costs relative to the amount of currency you put into that system. You've already secured the network. It's akin to Facebook's security system. It works the same regardless if it's 100 million users or 1 billion users.
    - kirian 14y ago
      My point is that fiat money systems have costs associated with them. I'm not arguing that the costs change if there is Quantitative easing or not.
    - parasubvert 14y ago
      $2 trillion in 15 minutes might be a wee bit of an exaggeration... considering the monetary base needs to, um, actually buy something, usually Treasury Bills. Which are managed by whole swath of administrators in the Dept of the Treasury (and could lead to printing presses -- for the T-Bills, anyway), as they're usually issued in bond series, etc.

tatsuke95 14y ago

>Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack. Funny thing,I called MG Seigler a hack, and was attacked. Even PG came out of the word works to say he was "embarrassed" by the comment. Now we are calling Nobel prize winning economists hacks and asses? The economic illiteracy of this place is what is embarrassing.

aristidb 14y ago
This should have been a reply. Attacking somebody else's comment by citing him in a new top-level comment is bad form.
bcoates 14y ago
I'd feel bad about it if the "Nobel Prize in Economics" wasn't a fraud.

parasubvert 14y ago

I think Bitcoin is useful as an experiment in economics and monetary systems. But the thinking is far from baked and opportunists are jumping on this so quickly that a lot of money is going to be lost, .com-style. Maybe not with Bitcoin, but perhaps with its successor. And a lot more money than the .com bust, because now we're not dealing with just "new economy" utopias, we're dealing with 100+ year ideological disagreements. Just looking at the comments here, most people seem to have received their economic eduction from political rants and newspaper editorial pages rather than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek, Schumpeter, or even Polanyi and Drucker). This is not to say the profession of economics is noble or even has any real use to the modern world currently, given its problems. But we do have an economic system, and some people do seem to have a better empirical understanding of it than others. And I'm not seeing a lot of empiricism here - lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's a good way to start something, but it's not a great way for it to finish the way you want. Ask the Marxists.

croddin 14y ago

What is the opportunity cost for bitcoin mining using different techniques? (ie the next most valuable thing that can be done with the hardware). I would guess it is a small fraction of the value of a bitcoin. I'm pretty sure it didn't cost bitcoin's market cap of ~1 billion in computing resources to mine all of bitcoins we have today. I wonder what it did cost?